Phil Parkinson, Legal Director at specialist property solicitors JB Leitch, considers the complexities of VAT for on-site staff.

Many residential and mixed-use developments across the country have on-site staff and the trend is growing significantly, particularly in city centre locations, as larger and more complex schemes are being built. On-site staff may include concierge, caretakers, porters, car parking attendants and extend to a variety of vocations that are, usually, provided for within the lease either directly or at the discretion of the landlord or management company. Indeed, often the physical presence of on-site staff is obligatory pursuant to the lease.

The situation with the application of VAT on the cost of the on-site staff is, however, far from simple. Indeed, even the Deputy President of the Upper Tribunal, Martin Rodger QC, when commenting on VAT vis-à-vis on-site staff costs, commented: “The VAT treatment of service charges is not straightforward and is not well understood”.

HMRC Guidance

It was historically understood that a VAT concession covered all cases of service charge where the charge was mandatory and the services were supplied direct to the resident. 

HMRC has, however, indicated that it takes a much narrower view of the concession and interest in the area was piqued by way of guidance provided by HMRC under the guidance note: Applying the correct VAT liability on residential domestic service charges (VAT information sheet 07/18). 

Broadly, the guidance note clarified that, whilst certain services and scenarios were exempt for incurring VAT, it also confirmed that if a landlord is contractually obliged to provide services to the occupant of a property, and uses a managing agent to provide these services, the property management company cannot use the concession. 

The resultant impact of this was clarification that, if a landlord instructed a managing agent (as is the common position) and the on-site staff are employed by the managing agent, standard rate VAT of 20% would be payable on all on-site costs of providing those staff.

Up until the point of the guidance note, it was common for standard rate VAT not to be charged on the provision of such staff based on an erroneous application of the VAT concession.

Ingram v Church Commissioners [2015]

The abovementioned guidance note followed a case heard before the Upper Tribunal (Lands Chamber), namely Ingram v Church Commissioners for England [2015] UKUT 0495 (LC) which dealt with a service charge dispute and, specifically, whether relevant items of VAT, charged for the provision of an on-site porter, included in the service charges fell within a statutory VAT concession. 

The lessee did not dispute the charging for the provision of staff but took issue with the associated VAT and challenged it, initially in the First-tier Tribunal (Property Chamber), on the basis that it ought not be passed on to lessees via the service charge mechanism. Having heard submissions from both the landlord and lessee, the Deputy President of the Upper Tribunal found:

1. That the concession for VAT “does not apply to optional services supplied by a landlord, managing agent or anyone else to a residential occupier”; and,

2. Further, that the concession for VAT “does not apply to any charges paid by the landlord (or other person levying the service charge) to third parties for the supply of the services even though the cost of those services is passed on to a residential occupier through a service charge”.

This decision resulted in a clear position that, where a lessor employs staff directly and passes the cost on to lessees, no VAT is payable but, where staff are employed by a managing agent who invoices a landlord for those services, VAT would be payable on the cost.

A Potential Trap for the Unwary

The recoverability of service charges in either scenarios are likely to be covered by well-drafted leases and is unlikely to provide a landlord with irrecoverable charges following a tribunal determination. It does create an associated risk, however, where such costs ought to be charged but have not been as, based on the guidance note, HMRC appear to have no intention of waiving the liability.

In closing, we can also consider wider – and potentially costly – scenarios which could hypothetically arise. As an example, HMRC may seek to recover unpaid back-dated VAT for on-site costs and landlords would be restricted from passing them on to residential lessees via the service charge (due to the statutory limit of 18 months provided for within section 20 of the Landlord and Tenant Act 1985) thereby leaving a landlord to settle a tax bill.